U.S. markets closed
  • S&P Futures

    4,118.25
    -8.25 (-0.20%)
     
  • Dow Futures

    33,665.00
    -38.00 (-0.11%)
     
  • Nasdaq Futures

    13,733.25
    -61.00 (-0.44%)
     
  • Russell 2000 Futures

    2,181.40
    -2.60 (-0.12%)
     
  • Crude Oil

    62.61
    +0.17 (+0.27%)
     
  • Gold

    1,783.30
    +4.90 (+0.28%)
     
  • Silver

    25.97
    +0.13 (+0.50%)
     
  • EUR/USD

    1.2037
    -0.0004 (-0.04%)
     
  • 10-Yr Bond

    1.5620
    -0.0390 (-2.44%)
     
  • Vix

    18.68
    +1.39 (+8.04%)
     
  • GBP/USD

    1.3931
    -0.0006 (-0.04%)
     
  • USD/JPY

    107.9790
    -0.0910 (-0.08%)
     
  • BTC-USD

    55,715.45
    +973.06 (+1.78%)
     
  • CMC Crypto 200

    1,276.37
    +41.96 (+3.40%)
     
  • FTSE 100

    6,859.87
    -140.21 (-2.00%)
     
  • Nikkei 225

    28,462.20
    -638.18 (-2.19%)
     

Will TPI Composites (NASDAQ:TPIC) Multiply In Value Going Forward?

  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·3 min read
  • Oops!
    Something went wrong.
    Please try again later.

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at TPI Composites (NASDAQ:TPIC), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for TPI Composites, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.045 = US$25m ÷ (US$986m - US$427m) (Based on the trailing twelve months to September 2020).

So, TPI Composites has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.3%.

Check out our latest analysis for TPI Composites

roce
roce

Above you can see how the current ROCE for TPI Composites compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering TPI Composites here for free.

What Does the ROCE Trend For TPI Composites Tell Us?

On the surface, the trend of ROCE at TPI Composites doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.5% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, TPI Composites has done well to pay down its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

Our Take On TPI Composites' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for TPI Composites. And the stock has done incredibly well with a 122% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

TPI Composites does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.